Our 'Fresh & Easy Stores' Lack A Sense of Place' Theory is Growing; Read What We and Others Are Saying Tesco Needs to Do With Fresh & Easy

We just finished reading a piece by Jim Prevor, sent to us from one of our readers. Mr. Prevor is a fresh foods industry consultant and writer who publishes a blog called the Perishable Pundit. He's been, like Fresh & Easy Buzz has, writing frequently about Tesco's small-format, convenience-oriented Fresh & Easy Neighborhood Market grocery store retailing venture in the Western USA.

We were pleased to read the following in Mr. Prevor's April 1 piece: "All these are good ideas [he has a list of seven suggestions for Fresh & Easy above this paragraph]. Our sense, however, is that there is a bigger problem [with the Fresh & Easy stores]. Many of the stores are ill-sited--they lack a sense of place--and it is unclear as to the kind of customer the stores are built for.

Some months ago, we first started writing about our empirical observation that one of the main problems with the Fresh & Easy small-format, combination basic grocery and fresh foods grocery markets, is that the stores lack a sense of place.

We sighted a body of sociological, anthropological and urban planning theory and empirical research called "Sense of Place Theory" as the basis of our assertion that the grocery store format--which has "neighborhood" in its name but not in its stores--lacks a sense of place, thus contributing to the fact people are shopping the grocery markets more like they do a conventional convenience store, rather than a neighborhood grocery store--which is how Tesco has positioned the stores--and how they must be shopped (primary and some secondary shoppers) in order to be successful.

We came upon this finding not only deductively by applying our knowledge and experience with "Sense of Place Theory" to the Fresh & Easy stores when observing and analyzing them in the field, but we also conducted what is called "action research," which is a social and behavioral science field research methodology.

[You can learn more about "action research" by getting the book, "A Practical Guide to Behavioral Research: Tools and Techniques," by Dr. Robert Sommer and his wife Dr. Barbara Sommer. Additionally, you can read a number of Dr. Robert Sommer's papers and articles here. Click here for Bob Sommer's complete list of publications.

Bob Sommer is a professor emeritus at the University of California, Davis, where he has been a Pychology professor--along with a consumer behavior researcher and pioneer--for 45 years. Dr. Sommer also is one of the founders of the field of Environmental Psychology, and was the founder and longtime director of the University's renowned Center for Consumer Research.]

Using the methods of behavior and observational "action research" (which you are now an expert in from reading Dr. Sommer's work linked above), we confirmed our hypothesis that the Fresh & Easy grocery stores are lacking a sense of place based on a number of objective criteria. [Action research is called that because it's not a mere theoretical exercise. Rather, as the term implies, it's a useful scientific research method to use in the real world (like a grocery store), the results of which can be used as data to make changes and improvements.]

Click here to read one of our more comprehensive pieces about the conclusions we reached, (and the suggestions we made in moving forward) about Tesco's Fresh & Easy grocery stores' lacking a sense of place, based on our research.

We're pleased Mr. Prevor independently arrived at the same conclusion we determined through our research, which is that a "big" problem with the Fresh & Easy stores is their serious lack of a sense of place.

[For more knowledge about "Sense of Place Theory" take a look here at what's called "Third Place" as well. Ray Oldenburg is one of the better writers on "Third Place" theory and practice. Coffee chain Starbucks has used "Sense of Place" and "Third Place" theory and practice extensively in it design, operations, marketing and merchandising strategy. Whole Foods Market, Inc. also has used elements of the concepts in its store design and merchadising practices.]

In his April 1 piece, Mr. Prevor also offers Tesco seven suggestions for moving forward with the Fresh & Easy format, operations and merchandising schemes.

His seven suggestions and a number of suggestions we've offered in the last few months are similar. (We've never met or compared notes.) And, he offers some good ideas we haven't mentioned, such as his concept that Tesco needs to stop running the chain like its a multi-thousand store operation rather than the start up it is. We also disagree on some key things of course.

For example, Mr. Prevor even offers a "final solution" of sorts in his piece, which is to break Fresh & Easy into two seperate chains--one a no-frills, discount grocery store format like Aldi, and the other a specialty grocery chain like Trader Joe's, which just happens to be owned by family members who also are the primary owners of German-based Aldi International.

We've thought about the same thing often. In fact, we warned of what we called a "format model muddle" problem with the Fresh & Easy grocery stores long before the the first unit opened. It's a real problem.

Statistitions and economists have a concept called BiModal Distribution. In very basic terms, it's a continuous probability distribution with two different and distinct (the Bi) modes. Up and down are bimodal modes, for example.

This concept has been applied to retailing, the results of which suggest in the case of grocery retailing. formats which have clear differentiation--Whole Foods as upscale, Aldi or Sav-A-Lot as no frills, discount grocers, for example--do the best. It's those in the middle, or without clear format differentiation, that fail the most.

Fresh & Easy does fall into this category in many ways (but not completely), so at some point we might determine that despite some significant format fixes, it might come time to scrap the current format outline altogether.

We aren't there yet. However, if Tesco doesn't make what we are calling significant format tweaks, we do believe the probability of the present format being successful with just marketing and merchandising changes alone is low.

In a nutshell, here are the basic (not all of them) suggestions we've offered to date on improving the Fresh & Easy format, operations, marketing and merchandising processes and practices, based on our field research, interviews with numerous vendors, consumers, store-level workers and others. You can find all of these suggestions in various pieces we've written in Fresh & Easy Buzz:

>Localism: There is a serious need to localize the stores' product mix (and to some degree the actual stores) to the neighborhoods in which they are located. This includes having a solid understand of and respect for the history, culture and demographics of each respective neighborhood a store is located in. From this knowledge flows product mix customization on top of the basic core mix that goes in every store. This customization process is category-wide.

Localism is actually a conceptual suggestion that covers many areas such as marketing, merchandising, format design tweaking and more. It's also a mind-set. It needs to permeate all that Fresh & Easy does in its retailing.

>Create a Sense of Place in the stores; or put the "neighborhood" in Fresh & Easy Neighborhood Market: This is explained a bit above. However, essentially the Fresh & Easy stores are too sterile and uninviting in our analysis to encourage customers to spend much time in them shopping and spending money, which is key to gaining primary shoppers. Doing so is vital for the chain's positioning as a "neighborhood" market, and essential for their financial success. As we mentioned above, there's what we call a "model muddle" within the Fresh & Easy format.

We've offered a number of suggestions for creating a better sense of place in the stores. Among the suggestions include: creating much more inviting bulk produce departments, creating a small, in-store "Fresh & Easy Cafe," in part modeled after Tesco's successful "Tesco Cafe" in the chain's UK stores, and adding design elements and unique features ("localism") to the stores which will reflect a given community and neighborhood's demographics, history and culture. This is done by numerous successful grocery chains. For a good example, note how Whole Foods Market, Inc. localizes it stores while still having an overall core design and merchandising mix. from a conceptualization standpoint, think "mass customization."

>Eliminate most of the packaged produce, with the exception of some specialty items, in favor of abundant, bulk produce displays. This is one of Mr. Prevor's suggestions as well. And of course it should be, he's an experienced produce man. So are we, among other things. And decades of that experience is in the Western USA market.

Americans, especially westerners, love their produce: lots of it and untouched in the main by bags, cellaphane and plastic containers. Sure, Trader Joe's sells produce in packages, and does pretty well with it, the argument will go. However, fresh produce is a mere sideline for Trader Joe's, compared to most supermarkets, large or samll-format.

For a grocer which is positioning its stores as a primary, neighborhood shopping venue like Tesco is with Fresh & Easy, produce can't be a sideline; it must be key. Fresh produce is one of the top-three reasons consumers choose a grocery store. And, at the top of their definition of "good produce" is fresh, bulk and lots of variety. Farmer's Markets have grown in the U.S. by 28% each year for the last 10 years. Does anybody wonder why? Let's see: fresh, abundant, wide variety, bulk, local produce....you get the point.

>Store Brand vs. National Brand: We've argued Fresh & Easy needs to change its current store brand vs. national brand product ratio (especially on basic grocery items) from it's current mix of about 65% store brand/35% national brand, to at a minimum 50% store brand/50% national brand mix. Even better, we've suggested, would be a 60% national grocery brand vs. 40% store brand mix.

We don't agree Fresh & Easy should eliminate most all of its store brand grocery items. We think the 60%-40% mix is good. If Tesco digs deep into it's corporate store brand marketing expertise it can do much with that 40%, which also (if marketed well) offers the Fresh & Easy chain a unique product offering to hang it's merchandising hat on. It's called differentiation. Again, it must be executed well. A little history: It took Trader Joe's many years to gain the popularity it has today for its various store brands. TJ's is doing store brand marketing far better than Fresh & Easy is though to date.

>Understanding and Executing a 'Western' USA Product Mix: We've argued the fact that in grocery retailing in the USA their are significant regional differences in brands and consumer product preferences. For example, Kraft Miracle Whip is one of the top two items in the condiment category in most of the Midwestern U.S. However, it ranks far-lower in California, for example.

What about Best Foods mayonnaise? That's what the category's number one selling brand is called west of the Rocky Mountains. East of the Rockies, the exact same product (also number one in the category) is called Hellman's. We've done studies: Western consumers claim Hellman's isn't near as good as Best Foods. They say they wouldn't buy it even if it was 40-50% cheaper. The east of the Rocky Mountain consumers say the same thing about Best Foods vs. Hellman's. There are numerous other, similar examples of the differences we mention.

There even are significant intra-region differences within the Western USA, for example. Even though there are more similarities than differences, the Southern California and Arizona markets have many brand and product preference differences. Even within California, there are many brand and product preference differences between Southern and Northern California.

The Fresh & Easy stores need a product mix review and analysis. This needs to be done by people who have experience in grocery retailing and merchandising in the respective markets: California, Arizona and Nevada. There currently are items in numerous categories--in some cases the number one and number two selling brands/skus--that aren't in the stores. Conversely, there are brands/skus that should be removed because they are poor sellers in the respective markets.

Picking a product assortment for a limited assortment format grocery store is far more difficult--and precise--than doing so for a standard-sized supermarket is. As we've suggested a number of times, Fresh & Easy needs to go back to the drawing board and review and optimize the product mix, across all categories, in the Fresh & Easy grocery markets.

>Fresh & Prepared Foods Out-of-Stock Problem: As we written often, Fresh & Easy continues to have out-of-stock problems in many of its stores in the fresh foods categories, especially fresh, prepared foods. This problem isn't due to massive sales unfortunately. It's a logistics problem. It's improved considerably over the last two months, but still exists.

We argue this is a problem that must be fixed "yesterday," or else it will define the Fresh & Easy stores in consumers' minds as "that store that's always out of what I want." The problem has already created this definition in the minds of numerous consumers we've talked to.

>Dump the Self-Scanning Checkout: American's don't like to scan and bag there own grocery purchases. It's been tried, going back to the 1980's, and has failed. Only a few, niche deep-discount grocers use it today, and its more a novelty than anything else. American consumers also don't buy the proposition that self-scanning leads to lower prices. Wal-Mart, Costco, bare-bones warehouse stores all have clerks who scan and bag customer orders. A chain would have to have really low prices to sell self-scanning to mainstream U.S. consumers; or even non- mainstream ones for that matter. Dump it and dump it fast, as we argued all the way back in December, 2007.

>A General lack of Consumer Awareness of Fresh & Easy Stores: To date, Tesco has relied almost exclusively on publicity generated via the media ("free media") to create awareness for the Fresh & Easy stores. Marketing PR if you will. This hasn't worked. Our analysis is that there's a low-level of consumer awareness (less in Nevada than Southern California and Arizona) in the neighborhoods where the stores are located. Therefore, we've suggested an integrated marketing campaign, using radio advertising as the campaign's "lead media horse." Tesco's "if we build it they will come" strategy hasn't worked thus far.

These six suggestions--and remember "localism" is a more conceptual, multi-purpose suggestion, as well as an attitude that in addition to the specific ideas we offered also must permeate all that the retailer does: format tweaks, operations, marketing, merchandising, customer service--form the basis of the suggestions for moving forward we've offered thus far over the last few months for Tesco's Fresh & Easy Neighborhood Market.

There are numerous points of agreement, and some significant differences as well, which are emerging from a group of grocery industry analysts and participants--who aren't in all cases talking to each other about the issues--about some of the ways Tesco needs to move forward in this now, new store opening "pause" period--and beyond--to help create a more successful outcome for the Fresh & Easy chain.

It's also clear most of these analysts aren't wishing Tesco failure with Fresh & Easy, as Tesco CFO Andrew Higginson suggested might be the case in this piece we ran yesterday.

As part of that "localism" which we humbly suggest should permeate all Tesco does with Fresh & Easy going forward, it might be a worth it to listen to what some of us experienced "locals" are saying. As we used to say in those old "action research" training sessions: 'There's no such thing as too little good data.'

The Analysis of Tesco's Fresh & Easy From Piper-Jaffray's Mike Dennis in This Interview Published Today Sounds A Lot Like Ours For the Last Few Months

In an interview published today by McClatchy-Tribune News Services, Mike Dennis, an analyst with the Piper-Jaffray investment firm which has offices in the U.S. and London in the United Kingdom, sounds alot like what we've been reporting, analyzing and writing about here on Fresh & Easy Buzz for months in terms of Tesco's Fresh & Easy Neighborhood Market's sales performance to date, its format, positioning and other variables.

Additionally, Mr. Dennis--with a few differences and less comprehensively--offers some very similar reasons and explanations in the interview published below for the current sales underperformance and problems with the 59 Fresh & Easy, small-format grocery stores currently operating in Southern California, Arizona and Nevada. The interview piece is below:

Tesco struggles in U.S. debut

McClatchy-Tribune News Service: Monday, March 24, 2008

Fresh & Easy, the produce stores that British retail giant Tesco introduced to the United States last fall, has underperformed during its first months in business, according to an analyst with a U.S. investment bank.

Most of the chain's stores have failed to meet Tesco's reported goal of $200,000 a week in average sales, said Michael J. Dennis, senior research analyst with Piper Jaffray, a middle-market investment bank and securities firm based in Minneapolis.

Most of the 59 Fresh & Easy stores operating in Southern California, Arizona and Nevada as of last week average $60,000 a week in sales, Dennis said during a telephone interview from his London office.

"Once you get past the first two aisles, the fresh fruits and vegetables and the fresh bakery items, everything has been bad," Dennis said. "The rest of their sales have been a disaster. They thought they could get $200,000 a week in sales based on all of the research they did, but it hasn't happened."

Dennis -- who specializes in finding investments for retirement pensions in the food and general merchandise industries -- changed his evaluation of Tesco stock from "buy" to "neutral" in his report.

"Tesco officials must be concerned that the Fresh & Easy concept is not right for the United States market and that they need to find out quickly what their issues are," Dennis wrote in his 11-page report, which was released Feb. 20.

Much of the report's information came from suppliers and grocery industry analysts, Dennis said. "Maybe Fresh & Easy isn't as robust a concept as we first thought, especially if their reduced prices aren't attracting customers in a near recessionary U.S. environment," Dennis wrote.

A Fresh & Easy official cautioned against giving up on the chain too soon.

"We opened our first stores in November, so they haven't been operating that long," said Brendan Wonnacott, spokesman for the El Segundo-based chain. "It's too early to speculate on overall performance."

Tesco officials are "very encouraged" by Fresh & Easy's performance so far, Wonnacott said. "Every week we're getting increased sales and increased customer traffic," he said. "We haven't closed any stores, and we don't plan to close any."

But Fresh & Easy, which operates a warehouse-distribution center at March Air Reserve Base near Moreno Valley, quickly encountered problems with U.S. shoppers, including stores stocked primarily with automated check-out stands, no push-carts and too many wrapped fresh fruits and vegetables.

"In the U.S., people like to handle those kinds of foods before they buy them," Dennis said. "They also like to buy those things individually, and Fresh & Easy sells a lot of things in packs of four and six. The idea was to emphasize fresh produce, but a lot of U.S. grocery stores sell fresh produce."

Food-industry analysts were optimistic about Fresh & Easy's chances for success in the United States last summer, after they visited a test store that Tesco officials operated in a warehouse outside Los Angeles.

"They flew people in from all over to shop there," said Dennis, who attended the test opening. He felt confident about the Fresh & Easy concept. "Tesco really believed they had found a hole in the market, which was people who were looking for a place where they could stop quickly on their way home from work and shop for food."

To improve its performance, Fresh & Easy might speak with its store managers to find out what works and forge a stronger marketing presence, the Piper Jaffray analyst said. "I think they really need to do some national marketing. They should find some celebrities and piggyback on them."

Fresh & Easy stores might not be suited for the U.S. market, said Mindy McBain, associate editor of The Shelby Report, a grocery industry newsletter in Gainesville, Ga. "They have automated check-out stands, and a lot of U.S. shoppers aren't ready for that," McBain said. and Nevada.

Fresh & Easy Buzz: In the published interview, Piper-Jaffray's Dennis is quoted as saying: "Last week the (Fresh & Easy) stores were doing $60,000 a week in sales."

This is a dramatic change from when Dennis first released Piper-Jaffray's Tesco Fresh & Easy research in which he said the stores were doing about $170,000 per-store, per-week. At the time, he said the stores were falling about $30,000 per-store, per-week short of Tesco's target of $200,000 a week per-store gross sales. It sounds like Piper-Jeffray has revised its numbers downward significantly. (We agree about the $200,000 Tesco target.)

We were one of the first analysts to report--at least a week before Piper-Jaffray released it's research report and $170,000 per-store, per-week estimate--that based on information supplied by our sources , Tesco's Fresh & Easy grocery stores, which average about 10,000 square feet, we're (and still are) doing about $70,000 -to- $100,000 in sales per-store, per-week.

We further explained a number of the Fresh & Easy markets were doing even less than the lower-end $70,000 a week amount in gross sales, but that a few stores, like the unit in Los Angeles and a few others which have been doing better, accounted for bringing the average to the range we have estimated.

Piper-Jaffray's sales numbers seem now to be closer in line with ours. We stick by our $70,000 -to- $100,000 weekly store gross sales numbers however.

Dennis also makes an excellent point in the interview piece about most U.S. analysts being taken-in with the Tesco Fresh & Easy format. This is true. Accept for a handful of analysts and grocer's who looked closely at the format and didn't depend primarily on the popular press reports about it, most wrote glowingly of Fresh & Easy, even though the only information they had was given to them by Tesco.

We believe this fact actually hurt Tesco with its launch of the Fresh & Easy small-format, convenience-oriented grocery store chain. The retailer spent a little too much time perhaps basking in the glow of what the majority of the U.S. business press and industry analysts said was going to be the second coming of grocery retailing in America that they took their eyes off the ball a bit. It can happen to anyone--positive press can be a heady drug after all.

This phenomenon also has resulted in Tesco being taken a bit off guard by current analytical commentary about the Fresh & Easy stores' underperformance. Remember, not all analysts, grocers and observors were writing those "British Grocer to revolutionize American grocery retailing" articles. A few were more balanced and thoughtful.

As our readers are aware, one of the key merchandising problems we've been harping on at the Fresh & Easy grocery stores is the pre-packaged produce.

This is fine for a specialty grocer like Trader Joe's which isn't positioning its stores to be basic grocery shopping primary venues. But for Tesco's Fresh & Easy, which needs its grocery markets to be primary shopping venues, it's a prescription for failure. Were pleased to see Mike Dennis makes this same argument in the interview piece today.

American consumers love lots of variety of fresh, bulk produce. Why do you think the hundreds of farmers' markets in the U.S. are so widely popular. New farmers' markets are opening at a rate of over 25% this year over last, for example.

Additionally, talk to any successful grocery executive, and he or she will tell you--at least in nine out of ten cases--that merchandising lots of fresh, bulk produce--abundance and variety--is one of the top-three merchandising keys to that respective chain's success. Conversly, if you want to look for indicators of failure at an American supermarket that's not doing well, make sure you check out the store's produce department as one of the first three or so things you do in evaluating that supermarket's sales underperformance.

As we've said on Fresh & Easy Buzz often, we don't believe failure is the only option for Tesco's Fresh & Easy format and grocery stores. Rather, we suggest change is the needed option to survive. These changes include format adjustments, along with merchandising, marketing and positioning changes.

The key changes we've previously outlined include:

>Changing from a primary pre-packaged fresh produce operation to a primarily bulk one, with some pre-packaged specialty produce items being ok.

>Increasing the Fresh & Easy store brand and national branded basic grocery items mix in the stores from its current about 65% (store brand) and 35% (national brand) mix, to at least a 50%-50% store brand, national brand ratio.

>Analyzing the stores' merchandising mix, particularly in the basic grocery categories. Fresh & Easy grocery markets are missing some key brands and items in key categories. In many cases, these missing items are the number one or number two selling items in their respective categories. Additionally, Tesco's Fresh & Easy merchandising executives need to better understand there is a distinctive western U.S. product mix (compared to the Midwest and eastern U.S., for example) in both the basic grocery and specialty grocery segments.

Most of the tops brands in the basic grocery segment are national in scope--but there are some significant western region mixes that every supermarket chain that's successful (Safeway, Ralph's, ect.) in California and Arizona understands. The western U.S. (and even within the western states) product mix is even more significant in the specialty, natural and organic foods' categories.

>Creating more of a sense of place (or putting the "neighborhood" in Fresh & Easy Neighborhood Market) in the Fresh & Easy grocery stores. Tesco has positioned the grocery markets as primary, neighborhood grocery stores. However, the fact is customers are shopping the stores like they shop convenience stores. Rather than doing their primary--or often times even secondary--shopping at Fresh & Easy markets, customers are using the stores more like C-stores. The stores' average-ring or market basket is evidence of this, by the way.

Tesco's Fresh & Easy Neighborhood Market can't make it if the stores only serve tertiary and secondary shoppers. Tesco knows this well based on its positioning and sales targets for the grocery store chain. Rather, the grocery markets have to obtain and retain a significant percentage of primary shoppers in order to generate the sales and profits required to be a financial success.

We've suggested Tesco needs to tweak the format to create a better sense of place in the grocery stores and put the "neighborhood" in Fresh & Easy Neighborhood Market. By doing this, the markets will become more attractive to neighborhood residents and motivate them to spend more time in the stores--and return more often--thus leading to a higher percentage of needed primary shoppers.

As we've written before, we suggest their are two ways to do this. First, Tesco needs to "localize" the grocery stores more. A Fresh & Easy store in a lower-income Los Angeles neighborhood can't look identical to, and offer the exact same merchandising mix as, a Fresh & Easy store in Metro Las Vegas. Rather, the stores need to respect and reflect the given neighborhood's history, culture, practices and ethnic make up far better than they do at present if they are to succeed. Remember: chain grocery stores aren't the same retail business model as chain fast food restaurants. The criteria is different.

This "localization" needs to include some individual format adjustments to the stores based on the neighborhoods they are located in, along with "localizing" the product merchandising mix in a number of cases so it better reflects the actual people (potential customers) who live in that respective neighborhood.

Second, we suggest that overall the Fresh & Easy grocery stores are not particularly inviting. In order to get shoppers to linger longer in-store--and thus to buy more--a grocery store needs to give shoppers a sense of place and a compelling reason or two for wanting to stay in it and shop rather than run-in and run-out like is the case--and design--of the C-store format.

One concept we have would be to put what we call a "Fresh & Easy Cafe," in some or all of the stores. This would be a smaller version (respective of the stores small-footprint) of Tesco's popular "Tesco Cafes," which are located in many of the retailer's UK supermarkets.

Further, we've suggested Tesco should think about format innovations or tweaks which would make the Fresh & Easy stores more "neighborhood-centric." By this we mean adding features in the store--perhaps a "UPS Store-like mail center which includes postal and other essential neighborhood-oriented services--and similar neighborhood basics which drive local residents to the stores, as well as enhancing the grocery markets' overall sense of place to the shoppers and potential shoppers. "It's my neighborhood store in my neighborhood, for example."

There are a few more format changes, as well as merchandising, marketing and positioning fixes which we believe in our analysis would help put Tesco's Fresh & Easy Neighborhood market grocery stores on better sales performance footing. But, that's a good start for now.